艾克爾 (AMKR) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2010 Amkor Technology Inc.

earnings conference call.

My name is Alicia, and I will be the conference monitor for today's call.

At this time, all participants will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

This conference call is being recorded today, Thursday, November 4, 2010, and will run for up to one hour.

Before we begin this call, Amkor would like to remind you that there will be forward-looking statements made during the course of the conference call.

These statements represent the current view of Amkor Management.Actual results could vary materially for such statements.

Prior to this conference call, Amkor's third quarter 2010 earnings release was filed with the SEC [on] Form 8 K.

The earnings release, together with Amkor's other SEC filings, contains information on risk factors, uncertainties and exceptions that could cause actual results to differ materially from Amkor's current expectations.

I would now like to turn the conference over to Mr.

Ken Joyce, Amkor's President and Chief Executive Officer.

Please go ahead, sir.

Thank you, and good afternoon, everyone.

With me today, is Joanne Solomon, our Chief Financial Officer.

Today, I'll talk about our third quarter performance and the associated business drivers and our expectations for the fourth quarter.

Joanne will then discuss our financial results in more detail.

And finally, we will open up the call for your questions.

To begin, our $794 million of revenues is our highest quarterly sales ever.

And given our expectations for the fourth quarter, we are well on our way to record net sales of $2.9 billion for the full year.

We delivered growth in all end markets and across all package families.

Sales were up in every sector -- Communications, Consumer, Computing, Networking and Industrial.

We saw notable strength in ball grid array packages, reflecting the demand from the gaming, computing and networking spaces.

Chip scale packaging and test services also saw healthy increases.

Moving on, gross margin was 24% in the third quarter.

Although this is on par with the second quarter, it is below expectations.

Gross margin pressure in the quarter was primarily driven by two factors.

First, strong consumer demand for gaming and TVs drove higher-than-expected ball grid array package sales.

PGA packages have higher material content.

So, while we're happy this area is strong for us, the shift in mix did put downward pressure on gross margin.

Second, we saw leadframe and wire [line] chip scale customers servicing the consumer electronics space adjust their levels of demand.

As a result, [package] utilization for these package families came in lower than we anticipated, which compressed our gross margin.

On a more positive note, we continued to deliver strong returns on our investment and generate positive free cash flow.

I'm pleased to say that based on our expectations for the fourth quarter, 2010 will be our fifth consecutive year of positive free cash flow results.

In the third quarter, we generated $42 million in free cash flow, while continuing to invest in the business.

Now, looking ahead to the fourth quarter, demand in the communication market continues to be solid.

That said, we see seasonal softness in demand for gaming and lower demand forecasts by some of our customers in the consumer electronics and networking areas.

Based on current customer forecasts and some uncertainty surrounding demand in consumer electronic chains, we anticipate a decline in net sales of between 5% and 10% in Q4.

We expect our gross margin to be in the range of 22% to 24%.

To wrap up my remarks, I must mention that we have the most talented and dedicated team in the industry.

Across the entire enterprise, our team is keenly focused on our customers and achieving world class status with respect to innovation, quality, delivery, cost and performance.

And at the same time, the team is also driving sustainable performance improvement for Amkor.

Our products and engineering expertise are well-positioned to take advantage of the industry's growth drives as we go forward.

With that, I will turn the call over to Joanne.

Thank you, Ken, and good afternoon, everyone.

To start, I will review our investing and capital spending activities.

We spent $171 million on capital additions in the third quarter, with significant investments in new capacity for communication, advanced technology initiatives and expanded facilities.

We did spend roughly $25 million less than we had anticipated.

The delivery dates for some equipment rolled into the fourth quarter, and we also slowed down our investment plans for certain equipment in response to our expectations for the fourth quarter.

So, as we finish out the year, we expect to spend around $75 million in the fourth quarter.

For the full year, this would result in a total of around $480 million, or a capital intensity of 16%.

And, as we discussed last quarter, we still expect about 60% to be for packaging, 20% for tests and 20% for infrastructure and R&D.

Moving on to the income statement, net sales grew 6% in the third quarter, with ball grid array packages delivering the strongest performance.

Unit shipments grew 5%, to 2.9 billion units, principally driven by leadframe packaging services.

Our sales to integrated device manufacturers, our IBM customers, were 48% in Q3, essentially flat with the second quarter.

We anticipate that the revenue split between our IBM and [fabless] customers will remain around 50-50 for the fourth quarter.

Ken discussed the primary drivers of the pressure we saw on third quarter gross margin.

And I will give some additional color on pricing and gold exposure.

The pricing environment remains stable, and price erosion was in the normal range, at around 1%.

In absolute dollars, our gold spending increased by $9 million for the quarter, around 60% of which was driven by the higher volumes.

Continuing down the income statement, operating expenses were lower than we anticipated, at $70 million, and down from $78 million in the second quarter.

Two items drove the majority of the decrease from the second quarter.

First, in the second quarter, we went live with several modules of our new ERP system.

In the third quarter, our costs for this phase of the implementation began to tail off.

And second, we reduced our bonus accruals to reflect our current full-year expectations.

For the fourth quarter, we expect operating expenses to remain generally consistent with the third quarter.

We estimate that our effective tax rate for the fourth quarter will be approximately 6%, primarily due to the continued profitability in Taiwan.

We expect our effective tax rate for the full year to be around 5%.

So, to finish up with the income statement, the lower gross margin, together with an $8 million foreign currency loss and a $5 million increase in income taxes, led to lower-than-anticipated earnings in the quarter.

Turning to the balance sheet, our financial position and liquidity are strong and continue to improve.

We ended with a cash balance of $417 million and a total debt of $1.4 billion, or $1 billion of net debt.

We have $20 million of debt maturing in the fourth quarter, and $149 million of debt that matures in 2011 In closing, we are well-positioned with our customers in the markets we serve, and our balance sheet continues to strengthen.

With that, we will now open the call up for your questions.

Operator?

Alicia?

Thank you, maam.

(Operator Instructions) Our first question is from the line of Satya Kumar from Credit Suisse.

Please go ahead.

Hi.

Thanks for taking my question.

I was wondering if you can give a breakdown of the material cost implications and [labor] in the gross margins.?

Sure.

We do provide a table in our press release.

The cost of sales is broken out by 43% material, which is actually up from Q2, where it was 42% of revenues.

Labor is 12% of revenues.

Other Manufacturing is 21%.

The net impact is a gross margin of 24%.

Okay.

You mentioned that in the leadframe business, utilization was less than expected.

I was wondering if the pricing comment that you made, was that across the board for the Company?

Can you talk about pricing specifically within the leadframe segment?

Is that more than normal?

Well, I believe that the pricing has been relatively stable throughout the quarter.

We saw some erosion in the area of around 1% during the quarter.

I think what we saw with respect to the leadframe packaging was actually softening in demand.

We had some excess capacity there.

Yes, I believe it's less about pricing.

And some of the weakness we saw in leadframes was with some of our most strategic customers.

So, we do see it as a demand adjustment and not as a response to any competitive pricing for us.

Okay.

And lastly, in terms of your guidance, you're talking about seasonal softness in gaming, which sort of makes sense, and [unsettling] consumers.

What trends are you seeing within the communication side of things in Q4?

Communication sector remains relatively robust.

It's actually strong for us right now.

All right.

Thanks.

The next question is from the line of C.J.

Muse with Barclays Capital.

Please go ahead.

Good afternoon.

Thank you for taking my question.

First question, if we go back to the September, early October timeframe, you had a much more positive bias to the Q4 revenue trend.

So, I guess when you look at specifically to end markets, I was hoping you could go into a little more detail as to over the last six to eight weeks, what has changed?

We 're seeing some adjustments in some of the demand forecasts from some of our customers, particularly in the consumer electronics area.

And in the networking space.

As you know, changes can happen in our industry relatively quick.

And we're seeing some adjustments going on there.

As we just mentioned a minute ago, in the communication space, which we have a heavy weighting, the demand is really very strong.

I guess what I'm trying to get a little more clarity on, is on the consumer side.

Because in one breath for Q3 you talked about higher BGA because of gaming and TV as part of consumer electronics, but then also saying that consumer electronics is weak.

So, I guess can you be more specific as to which part has weakened?

I could take a crack at it.

As we look to our customers and they adjust their forecasts, people just don't want to get caught with a lot of inventory these days.

They're adjusting demand, waiting to see how holiday spend happens.

And we'll see where the demand patterns shake out.

Okay.

Then I guess another question kind of on your Q3 results and Q4 outlook, if you compare and contrast [versus], particularly ASE, you're lagging here, I know over two-quarter timeframe, it's not the right kind of metric.

You've got to look at it over a much longer period of time.

But, still, it's worth asking the question.

Are there share losses embedded in here in either Q3 results or Q4 guide that you can help with?

I don't believe that we are losing market share.

As you know, I can't comment as to their forecast and guidance into Q4.

What I can say is, our business models are a little different., our customer base is a little different.

And, for example, they have a much heavier presence in PC and volatile memory DRAM than Amkor would.

But beyond that, I really can't comment.

But I will say this.

I do not believe that we are losing market share.

I'm just seeing adjustments in demand in, once again, in the consumer electronics and networking as we move into Q4.

Okay.

And then final question for me.

Joanne, as you think about planning for CapEx in 2011, and considering seasonal issues at hand today and also more limited visibility, what are your initial thoughts for CapEx in 2011?

And how are you planning to bring that online?

We're in the middle of our annual operating plan.

We're making certain assumptions with respect to next year.

As you know, we manage towards a capital intensity, and we'll adjust our capacity expansion plans based on as we continue to refine our estimates for next year.

What we always say historically, is from a business model perspective, our capital intensity ranges between 10% to 14%.

In years of growth, we can see in the 12% to 14%.

In relatively stable years, we tend to be 10% to 11%.

That said, this year we're above the 14%.

We're at 16%.

So, in years that we have [expanded] facilities or invested in R&D, or there's a rapid growth, you could exceed the 14%.

So, we'll see where 2011 [shapes] up.

Thank you.

Thanks, C.J.

The next question is from the line of Peter Kim with Deutsche Bank.

Please go ahead.

Hi, t thanks for taking my questions.

The first question I had was regarding J-Devices.

What was their contribution?

It looks like they posted a loss this quarter.

No, they actually posted a profit.

Do you have that, Joanne?

I think it's around $2 million.

Yes, I think the sign is a little bit confusing the way we present it.

The bracketed number is $2.2 million.

So our pick-up is $2.2 million.

What's your outlook for the next quarter?

They're doing really well, they are transitioning.

They have heavy integration plan that they need to work through as they continue to integrate these factories.

Beyond that, I don't have too much granular information to know how their demand patterns compare to ours.

For us, because it's relatively small given we only own 30% of J-Devices at this point, we're expecting maybe about a $1 million dollar pick-up.

So, a little bit less than what we saw for Q3.

Lastly, with regard to the chip scale packaging, I think you've made some pretty heavy investments in that area.

But it looks like ball grid array is out-performing chip scale packaging.

I was wondering if you could talk about the utilization of chip scale packaging, and whether or not you feel like you need to continue to invest in that space?

Actually on the FlipChip side of chip scale packaging, our business has been very good and very strong.

So, our investments there are right on target and serving us well.

Where we're seeing softness is in some of the wire bond chip scale packaging, which is more of a legacy product for us.

Okay.

Thank you.

Yes, and just on the utilization side, as Ken mentioned, the FlipChip CSP and the FlipChip Stack CSP, they're at full utilization capacity here in Q3 and Q4, as we support the growth patterns for communications that Ken mentioned earlier.

Great.

Thanks.

(Operator Instructions) The next question is from the line of Tim Arcuri, with Citi.

Please go ahead.

Hi, this is [Wenga Yan] for Tim.

Couple of questions, First of all, your Q4 guidance.

I just want to have a breakdown of how much of it was due to the seasonal factor, and how much of it was due to the softness in the industry?

It's hard to break that out.

I mean, on the seasonal impact, the guidance is 5% to 10% down.

And it would be hard to break that out between the seasonal impact and what the customers are doing as far as adjusting the demand.

Okay.

So, for most of your customers, what do you see of their lead time and inventory at this point, compared to the normal seasonal level?

Our customers' demand?

The lead time and inventory.

Well, I think the inventories, with respect to the communication sector from our customers' standpoint, are pretty much appropriate to the levels of demand.

I think in the consumer electronics end of the business and in the networking, I think our customers are very closely managing their inventory.

And it depends on how the sell-through goes in the holiday season.

I think that's responsible for some of these demand adjustments that we're seeing.

Okay.

To the [wideband] business, you mentioned there is some [under]-utilization of your capacity.

Was it because of the general softness of the market ?

Or, some other shift to copper wire that led to some of the market share

No, I don't think it's a shift to copper wire.

To the extent that our customers request copper, we've been able to meet their needs.

We see this more as a demand adjustment.

As you know, the wire bonds are pretty ubiquitous and used in many, many different products.

It's more of a demand adjustment than it would be a shift to copper, that's for sure.

Okay.

My last question is regarding your investment in advanced packaging.

Do you see any kind of meaningful contribution on your gross margin side?

[Does] advanced packaging tend to have a higher margin profile?

And if so, when do you think the gross margin improvement will happen?

Absolutely.

Our advanced packages are doing really well, both when we talk about FlipChip CSP and FlipChip Stack CSP [in port of] communications.

As we mentioned a little bit earlier, those lines remain at high utilization, so that we're still having a strong growth in those areas, and they contribute very favorably to gross margin.

As a reminder, communications is about a 34% contributor of the overall pie.

So, while it contributes, it's hard for that one segment to overcome any weakness in areas like leadframe.

So, we do see strong contribution beyond -- I don't know if you have any further comment.

No, Joanne, I think you've covered it well.

The next question is a follow-up from the line of Satya Kumar from Credit Suisse.

Please go ahead.

Hi, thanks.

I was wondering if you could add some color on your business with IBM.

Is that a business on contract, and is that coming up for review at the end of the year?

How do you expect your market share to track there next year.

We have a supply arrangement with IBM, and we're pleased to announce that we've renewed that supply agreement with them for a period of three more years.

That part is going well.

IBM is a very valued customer to Amkor.

We have really good business with them, and Q3 has been very strong in the gaming areas.

So, from that perspective, I think the relationship with IBM is going very well right now.

When did you renew that contract?

It was earlier this year.

I want to say it was probably in the Q2 timeframe.

There's some disclosures our 10-Q on that.

Thank you.

And secondly, on the (inaudible) last week, and they talked about semis doing 5% and foundries doing 14% for next year.

I know you're the [leading force] for the Taiwan foundries, perhaps compared to other foundries that are starting up now.

I was wondering if you could talk a little bit about the puts and takes in terms of how the foundries are thinking about growth related to what it might mean for you for next year.

And Joanne, I was wondering if you also could be a little bit more specific in terms of the capital intensity.

If we were to get the [semi con] industry to grow, 5% or 10% next year, how should we think about the capital intensity for Amkor next year?

I think the growth with respect to the foundries, we see that as very positive.

We expect good growth in the semiconductor industry in 2011, and we're hoping to benefit from that.

As you say, I don't know where the exact number is going to come out, but that does provide wafers for our customers.

And so, we look at that as a very good trend.

We look at the investment being made by the foundries to put the capacity in place to help our customers, and we'll go from that going forward.

Joanne?

On the capital intensity side, I guess the additional color I could provide is the likely areas that we would see investments.

I would certainly expect to see continued investment in support of communications in the FlipChip areas.

This year, we recently increased and expanded our bump capacity, and so I don't know how much more we would need to do with that for 2011, maybe more modest as compared to this year.

I would expect that we would continue to obviously invest in R&D in support of [free selection video].

And depending on how strong of a growth year it is, we could see around the higher levels of the intensity range that I gave.

But it's really hard to say right now.

But as soon as we know, we'll --

Is that a minimum CapEx number for these technology type CapEx, like [Com FlipChip and CSP?]

There isn't really a minimum.

We adjust our demand levels.

We do try to time it with the demand patterns that we're seeing.

So, I wouldn't say that there's a minimum.

We do continue to modernize our facilities as an ongoing process.

So, there is some level of disposals and replacements that happen each and every year.

So, from a minimum level, maybe it's $50 million to $100 million just as a minimum CapEx level to keep things going.

What is your view or CapEx players [sub con] competitors.

ASE]is talking about maintaining a flat CapEx.

[SPIL] is talking about down significantly for spending next year.

What's your overall assessment of what CapEx is doing in the industry?

Our CapEx is tied very closely to our close collaboration with our customers.

So, as we look at their demand trends, we'll make sure that we have certainly have the cash available and the resources to do it.

We'll invest for them as we need.

With respect to ASE and SPIL, once again, it's very hard for us to comment as to their investment parents.

And lastly, Joanne -- sorry.

The only other thing I would add is that it's always a balance that we balance profitable growth with free cash flow.

Our competitors are investing at higher levels of intensity right now.

Lastly, can you give us a sense of customer concentration in Q3, please?

The customer concentration, we had no customers over 10%.

Our top 10 made up about 55%.

Thanks.

The next question is from the line of line of Eric [Ribel] from MTR securities.

Please go ahead.

Hi, good afternoon.

Thanks for taking my questions.

I got on the call a little late.

I apologize if you went over this already, Joanne.

The SG&A was down pretty good in the quarter.

Any comments around that movement, and is this a run rate that we should be looking at?

We saw two things drive SG&A lower sequentially.

In Q2, we went live with several new modules of our ERP implementation in Q2.

So, those costs tailed off in Q3.

Second, we did adjust down our bonus accruals based on the current expectations for the full year.

As far as run rate goes, I would expect to see us stay right about at the same level for Q4.

Okay.

There wasn't any change in legal costs or something that had a traumatic impact on the run rate?

Not from a legal cost perspective.

Legal costs, depending on the activities we have, will create some volatility.

But that wasn't the case from Q2 to Q3.

Joanne, if you could talk generally about 2011, could you give me a sense of what the depreciation run rate should be?

And any thoughts on Capex for 2011?

As far as depreciation run rates, we'll continue to invest depending on our ultimate views with respect to 2011 growth patterns.

I would expect to see some incremental raises to depreciation expense.

I don't really have anything handy to give you more granularity to it.

But, some mile increases.

I think as a percentage of revenues, our depreciation has been running right around 10% 11%.

So, you could model it off of that, is probably the best modeling.

Thanks.

That's great.

You had a part two to the question, Eric.

I apologize.

I forgot.

Part two was on your thoughts on CapEx for 2011.

CapEx for 2011.

We mentioned earlier on the call that we don't have firm plans or expectations as to the level of investment.

What we say in general is that capital intensity runs around 10% to 14% as a business model.

In years of growth, we tend to be in the 12% to 14%.

And years similar to this year, where we had heavier investments in infrastructure and R &D, we were at 16%.

We expect to be at 16% this year.

So, depending on your views on is it growth?

Is it stable?

That's where we'd be on the scale.

Great.

A lot of focus on copper going into 2011 and the transition.

What sort of percentage of packages are copper now, and what would you expect the percentage to be exiting 2011?

I don't have the exact percentages.

It's a pretty small percentage for us.

Most of our customers that are in the higher-end packages, there is still a preference for gold over copper.

That being said, we have a lot of packages with some of our customers in qualification for copper.

But, Eric, I don't have it right in front of me.

It's a very small percentage of our total business.

Okay.

Ken, in the past you've talked about [die] support to forecast.

You've talked about how customers are actually delivering and how accurate the forecasts are.

I think in Q3, that was pretty consistent throughout the quarter -- or in Q2 it was pretty consistent throughout the quarter.

Did you see any changes throughout the quarter, and how is that tracking for Q4?

Very good question there, Eric, because actually, we are seeing some adjustments in die support.

We saw some softness in die support in the consumer electronics area and networking as we started to exit Q3.

We see that carrying forward into Q4 based on some of the demand forecasts that we're looking at, too.

So, we are seeing some softness in die support.

We think that's a reflection of some of the adjustments that we're seeing in the demand forecast going forward.

Ken, just to sort of follow-up on thar, are you seeing the forecasts come down and the die support come down?

Or, is it just the die support?

The forecasts are staying the same, but the die support is a little weaker.

No, we actually saw some weaker die support as we were exiting Q3.

And in top of that, we're seeing forecast demand adjustments being adjusted down also.

Great.

One last one for me.

Ken, on Japan, you guys were an early mover there.

The market is still largely captive.

As you see the market moving forward, does your position in [Aweite] allow you to sort of get more Japanese outsourcing business into those factories?

Or, are you seeing more of an interest for Japanese customers to look to outsource externally outside of the geography?

If you can give color there.

We have been in Japan, Eric, for a long time, Amkor has.

And Japan has been a big market for us.

We do see an increase in the outsourcing from a number of the major IDMs in Japan.

So, great growth opportunity for us.

And, the other thing is, is that some of the customers in Japan are trying to migrate some of their business offshore for lower costs.

To that extent, we're also there to service them, whether that's China or -- historically, we've serviced a lot of demand out of Japan and Korea.

We're getting demands in China and in some of our other locations, also.

So, we just see really strong growth opportunities in Japan.

We believe that's a great market for Amkor.

Great.

Thanks a lot.

The next question is from the line of Jake Kennedy with Morgan Stanley.

Please go ahead.

Hi, Ken, hi, Joanne.

Joanne, did you buy back any bonds during the quarter?

Hi, Jake.

We did not buy any bonds back in the quarter.

Okay.

And it looks like the debt went down a little bit.

Which debt did you reduce?

Back in Q2, we did a transaction with a bank in Korea, [Muri Bank], where we borrowed some proceeds and did a tender offer here in the US.

We did have some unused proceeds.

We weren't able to bring in as much of the 26 [teams] as we had hoped.

In July, we returned the unused piece to (inaudible).

That was about $47 million.

Then there was some amortizing debt in the foreign jurisdictions that made up the difference, I think it was about $20 million on top of that.

Okay.

As you guys think about the free cash flow that you're going to generate, can you walk through what your priorities are for that in terms of debt repayment, or share repurchases, or M&A, things like that?

We always consider different alternatives for the use of any free cash that we generate.

Historically, we've been prioritizing, reducing our debt, getting closer and closer to our target of net debt of $500 million.

We do, from time to time, look at acquisitions.

We certainly like acquisitions, like we've been doing with Toshiba and IBM, where we collaborate with a customer and buy some assets and into a [fly] arrangement.

With respect to technology investments, we did an acquisition of technology in Taiwan with [Unidex].

So, we always look at opportunities like that.

With respect to other capital markets transactions, we'll take a look at it.

If it makes sense, we'll l come up with a recommendation.

I think that runs through the list of things.

Obviously, CapEx is a big piece of it.

Taking a look at investment back into the business more organically.

Okay.

When you talk about the long-term net debt position of around $500 million, is that the consolidated debt on the balance sheet, or do you exclude the converts that are owed by the Chairman.

We have converts that are traded publicly as well as held by the [King] family.

It's about $350 million that we believe are likely to convert into equity rather than being paid from cash at maturity.

We certainly factor that in on our internal goals as to whether we're getting close to our optimal target.

But from a street perspective, it's debt until it's not.

We see it more as equity, and others see it more as debt.

Okay.

Lastly, when you talk to your consumer electronics and networking customers, are they telling you that they 're worried at all about overall inventory levels that they're seeing in the channel?

They haven't really expressed a concern about [roll] inventory levels in the channel.

But , I know this.

They are managing their inventories very closely, probably watching sell-through.

But, I guess the way that you hear them is when you look at their, once again, die support that comes in.

We are seeing some softness as we exit the quarter.

And two, the other thing that we listen to, is their demand forecast, which we adjust weekly.

They're bringing those down a

Okay.

Thanks very much.

Thank you, Jake.

I'm showing there are no further questions at this time.

I will turn it back over to Management for any closing remarks.

We thank you all for being with us, and thank you for your participation and questions.

Ladies and gentlemen, this concludes the Amkor Technology third quarter earnings conference call.

If would you like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 ,and enter in the access code of 437-6952.

Thank you for your participation.

You may now disconnect.